Wage China Currency War With Light Armor, Investors Say

D-Day arrives in the war over China's currency policy -- but investors worry that a big stick isn't the right weapon for the U.S. to wield.

(World Currency War story updated for IMF meeting commentary, position of U.S. business interests)

NEW YORK ( TheStreet) -- The War of the World Currencies has begun! Will it be a foreign exchange campaign of shock and awe, with the mission soon accomplished of getting China to surrender its currency controls, or will it turn into another Hundred Years war?

Even though there have been skirmishes on the currencies front for years, a speech last week by Treasury Secretary Tim Geithner, coming just ahead of the G20 meeting, played in the media as the declaration of war against China for keeping its currency low to gain trade advantages.

The currency war has been a powder keg for weeks. Geithner has been pressured to take a harder line against China as the U.S. struggles to regain its economic footing, just one among a raft of ideas coming to the forefront as a result of the lack of real economic recovery in the U.S.

The United Steelworkers union recently asked the Obama administration to challenge China's support of its green energy industry as an unfair trade practice. The House of Representatives recently voted to give President Obama the authority to place tariffs on goods from any country that has an unfairly undervalued currency (read: China). Amid this uproar, the Treasury Secretary was chastised during recent Senate hearing testimony for doing nothing about China's unfair currency controls, leading up to Geithner's speech at the Brookings Institute.

So Geithner finally dropped the yuan bomb, but really, it was more like a touchy-feely call for worldwide cooperation. Geithner didn't declare war with a rifle aimed at China. Instead, the Treasury Secretary called for a UN-like, multinational effort to convince currency bad boys to play by the same rules as the rest of the world.

World Bank President Robert Zoellick had Geithner's back, echoed Geitner's words of caution, saying that the currency war could cause widespread unrest in the markets, with investors running for the exits as the world's economic powers fight over the right valuation for China's yuan. Speaking at a news conference, Zoellick said, "If ever there were a time that we should not turn our backs on international cooperation, it is now."

It's no surprise that the Obama administration and the World Bank are taking the multi-national approach to the China currency confrontation. There's good reason to take it slow in fighting the War of the World Currencies.

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